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A Wall Street Journal story (here) reports that Joseph Umansky, president of AIG Reinsurance Advisors, the unit involved in a number of the reinsurance transactions that are the subject of the broad government investigation of American International Group, has reached an immunity agreement with prosecutors. Under such agreements, the recipient receives an order, authorized by 18 U.S.C. Sec. 6002, that grants limited immunity -- called "use/fruits" immunity -- to permit the person to testify without the statements or any information derived from the testimony being used against the witness in a subsequent criminal proceeding. Federal and state investigators have been scrutinizing AIG's transactions with two off-shore reinsurance companies, Union Excess Reinsurance Co. and Richmond Insurance Co., that it now acknowledges controlling.

Although the government prefers not to give immunity, in this case it likely concluded, after receiving a proffer from the witness or his attorney, that Mr. Umansky had sufficient involvement in questionable transactions to require greater protection than a letter stating that he is only a witness in the investigation, which provides no real protection to the person. At the same time, he must also be seen as someone who can provide valuable information regarding senior AIG executives, perhaps including former CEO Maurice Greenberg and former CFO Howard Smith, to avoid having to reach a plea agreement with the government. Both Greenberg and Smith asserted the Fifth Amendment in the investigation, and AIG's disclosure about its internal investigation states that senior executives were able to circumvent internal controls, a red flag for possible accounting fraud. I think it is likely that the immunity agreement is another building block in putting together a criminal case against former AIG executives. (ph)

UPDATE (5/14): A New York Times story (here) sheds a little more light on the immunity agreement that adds a new wrinkle to what I wrote above. The Wall Street Journal article stated that the immunity agreement was reached with "authorities," and I assumed (I know, "Whenever you assume . . .") that it was with the federal and state authorities. The Times indicates that the agreement is with N.Y. Attorney General Eliot Spitzer's office, with no information about the involvement of federal prosecutors. The immunity may signal another instance of the unseemly competition between Spitzer and federal agencies to take the lead in bringing cases. While a grant of immunity by a state does not necessarily protect the witness from a separate federal prosecution, any sharing of the immunized information would taint the federal investigation. Once Umansky is granted immunity by New York and provides information, it is hard to see how it would not seep out and become available to federal investigators, thereby effectively immunizing him from federal prosecution. What I haven't seen yet, and the news reports are still very general, is any indication of federal-state cooperation on immunity. It may be that federal prosecutors accepted Spitzer's actions, but things could get more difficult if there are plans to grant immunity to more senior executives in Spitzer's drive to indict Greenberg, Smith, and perhaps other top AIG executives. (ph)